Puerto Rico Electric Wins Debt-Cutting Deal With Creditors

Puerto Rico’s electric utility reached an agreement with insurance companies MBIA Inc. and Assured Guaranty Ltd. and bondholders to restructure its $8.2 billion of debt, marking a first step by the Caribbean island to reduce financial obligations that have left the government contending with a mounting fiscal crisis.

The deal brings together the Puerto Rico Electric Power Authority, the largest U.S. public-power provider, insurers and others such as hedge funds that hold 70 percent of its debt, the agency, known as Prepa, said in a statement late Wednesday. Its obligations would be cut by more than $600 million, with investors taking losses of about 15 percent in a debt exchange. The transaction aims to free up cash so the utility can modernize plants. The pact requires that lawmakers approve the deal by Jan. 22.

“It gives us liquidity, it gives us breathing room,” Lisa Donahue, Prepa’s chief restructuring officer, said in a telephone interview Wednesday night. “It gives us cash to invest in infrastructure and to provide, ultimately, sustainable clean power for Puerto Rico.”

The accord will result in the largest-ever restructuring in the $3.7 trillion municipal-bond market. It may be viewed as a potential guide for how other Puerto Rico agencies could cut their debts as the government rapidly runs out of cash.

Puerto Rico, with a population of 3.5 million, owes $70 billion, more than any U.S. state except California and New York. Governor Alejandro Garcia Padilla is seeking to reduce that debt load by asking investors to take losses on their commonwealth holdings.

The agreement enables the utility to avoid defaulting on a $196 million interest payment due Jan. 1 and free up funds by refinancing $115 million of debt if lawmakers approve the deal next month. The insurers will provide a surety bond of as much as $462 million that will guarantee repayment in the event of a default.

Prepa has been negotiating for more than a year. The process shows the difficulty Puerto Rico faces in seeking to persuade investors to accept less than they’re owed on its bonds, which were sold by more than a dozen different arms of the U.S. territory. Garcia Padilla said on Dec. 9 that the commonwealth may default as soon as January because it has run out of cash.

To restructure Prepa’s $8.2 billion of outstanding bonds, investors holding about 35 percent of the debt will take a 15 percent loss by exchanging their securities for new bonds repaid with revenue from a customer surcharge that flows directly to the bond trustee. The transaction must be executed by June 30. Other bondholders, such as individual investors, will have the option to participate in the debt exchange.

The parties reached a tentative agreement Dec. 17 after Donahue flew from Puerto Rico to New York to craft a plan before an existing bondholder deal expired, according to a person with knowledge of the talks who asked for anonymity because the discussions are private.

The restructuring would be the first step in Puerto Rico’s goal to reduce its obligations. It follows Garcia Padilla’s failed attempt this month to persuade Congress to include a provision in a $1.1 trillion spending bill to allow commonwealth agencies to file for bankruptcy protection. House Speaker Paul Ryan directed committee heads to come up with a plan for Puerto Rico by the end of March. Congressional Democrats this week filed bills that would shield Puerto Rico from any lawsuits until then.

A Prepa bond maturing July 2026 traded Thursday at an average price of 58cents on the dollar, up from an average 53 cents on Dec. 18, data compiled by Bloomberg show. The average yield was about 12 percent.

The accord with the insurers, who had balked after an earlier deal was struck by bondholders, is the final piece in a plan to ease Prepa’s debt payments so it can invest in rehabilitating a system that uses crude oil to produce electricity. It would give Prepa debt-service relief for five years of more than $700 million.

The deal still needs approval from Puerto Rico lawmakers, who are set to reconvene on Jan. 11.

The commonwealth’s agencies are unable to file for municipal bankruptcy protection, a provision that their counterparts on the U.S. mainland can access. The U.S. Supreme Court on Dec. 4 said it would hear an appeal by the commonwealth to reinstate a local debt-restructuring law that would allow some island public corporations, including Prepa, to ask bondholders to take losses.

Puerto Rico's electric utility reached an agreement with insurance companies MBIA Inc. and Assured Guaranty Ltd. and bondholders to restructure its $8.2 billion of debt, marking a first step by the Caribbean island to reduce financial obligations that have left the...